As I have written from time to time over the past several years, legislative activities in Washington, such as the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), have enormous impacts upon businesses and create additional legal requirements that general counsel need to be aware of.
At the outset, as I have written in the past, Dodd-Frank has placed a crushing burden on the rule-writing machinery of the various Washington regulators. This has created log jams surrounding some very controversial issues. However, it appears, in some areas at least, that the bottlenecks may break, flooding companies with new or proposed regulations. As a result, attorneys should keep a close eye on the regulatory agendas, which can be accessed at our website: http://www.centerforcapitalmarkets.com
Today, I will give a quick recap on the progress of some of these initiatives.
As is well known by now, the SEC rule on mandatory Proxy Access (14a-11) was vacated by the D.C. Circuit Court of Appeals in Business Roundtable & U.S. Chamber of Commerce v. the Securities and Exchange Commission. This ruling did not vacate the 14a-8 part of the rule, which was not challenged, allowing shareholder proposals to create a proxy access right by amending a company’s bylaws.
At the end of 2011, Securities and Exchange Commission (“SEC”) Chairman Mary Schapiro stated that the SEC would not revisit a mandatory proxy access rulemaking in the near future.
As proxy season heats up, there have been a number of proxy access proposals that have been filed by shareholders. In some cases the SEC has allowed proposals to be excluded, if they are vague or in fact contain more than one proposal. In other cases, the SEC has allowed the proposals to move forward.
The SEC’s treatment of 14a-8 proxy access proposals and the shareholder’s interest in them are items that businesses should pay close attention to.
As discussed in earlier articles, conflict mineral disclosures contained in Section 1502 of Dodd-Frank and the SEC has missed the April, 2011 deadline to finalize the implementing regulations. The October, 2011 SEC roundtable concentrated on many of the implementation problems raised by the business community. Also, the Small Business Administration took the rare step of filing its own comment letter and took the SEC to task for not quantifying the costs of conflict minerals regulations upon vendors of public businesses.
Attorneys should keep an eye on conflict minerals, even if their companies are not ensnared in its web, because this rulemaking has created a bottleneck that has prevented other corporate governance and executive compensation rules from moving forward. Therefore, once conflict minerals is finalized, we should expect quick action on several other rulemakings that have been pending for some time.
SEC Chairman Mary Schapiro has testified that she expects the conflict minerals rulemaking to be completed by June. There have been press accounts of intense negotiations going on behind the scenes to broker a compromise. Not much has leaked out, but it appears that things may be moving to a head. While some of the potential changes that have been discussed in the press appear to be favorable to the business community (furnishing conflict minerals reports instead of filing them), the non-governmental organizations have been lobbying the SEC to issue a rule without any changes.
The Dodd-Frank Act, in Section 952, establishes independence standards for compensation committees, similar to those established for audit committees under the Sarbanes-Oxley Act. The SEC has already released proposed rules, and the comment period closed on May 19, 2011.
This is one of the rulemakings that is being held up by conflict minerals. It is expected that the SEC will turn its attention to this proposed rulemaking once conflict minerals is resolved.
Disclosures creating a linkage between CEO compensation and the financial performance of a company and a ratio between the CEO compensation and the median compensation of company employees were also mandated by the Dodd-Frank Act Section 953. The SEC has not proposed rules implementing these provisions. It is anticipated that these rules will be proposed through a release this summer.
Nevertheless, the pay ratio has come under bi-partisan fire because of the differences of ratios between industries and the lack of useful information that such a ratio would provide to investors. Rep. Nan Hayworth (R-NY) introduced H.R. 1062, the Burdensome Data Collection Act, to repeal the pay ratio provisions. H.R. 1062 was approved by the House Financial Services Committee, and floor action is expected before the end of the year.
In January, a group of 23 trade associations, including the Chamber, sent a letter to the SEC raising concerns over these disclosures and stressed procedures, such as cost-benefit analysis, holding a roundtable, and engaging in negotiated rulemaking, which should be followed in the development of this rule. In mid-March a group of 20 members of Congress sent a letter to the SEC asking that the Pay Ratio and Pay for Performance rulemakings receive a priority and expeditious consideration.
Following the 2008 financial crisis, one cause de jure was a legislative effort spearheaded by Senator Schumer to mandate a separation of the offices of CEO and chairman. Under the final Dodd-Frank Act, companies need only disclose the reason for its leadership structure. While the issue has been silent for the past couple of years, this proxy season has shown an uptick in activist investor interest in shareholder proposals regarding separation of the CEO and chairman roles. Counsels should keep an eye on this to determine if this is a blip or part of a longer-term strategy to revisit this issue.
As is well known, the SEC and CFTC rules implementing the Dodd-Frank whistleblower provisions were finalized last year. It is anticipated that H.R. 2483, the Whistleblower Improvement Act, which would require whistleblowers to first report through company internal compliance procedures, will see further legislative consideration this year.
In her year-end speech, SEC Chairman Mary Schapiro indicated that the SEC may move on the long-dormant Concept Release on the U.S. Proxy System. Schapiro also indicated that the SEC was looking to move forward to regulate proxy advisory firms. Coupled with an alleged scandal regarding the sale of client information by ISS employees in Boston, as well as a more aggressive stance taken by some in the business community, notably BlackRock and Disney, it appears that there may be some new interesting developments that could be brewing in this area.
Last year, we cited the Volcker Rule as a regulation to watch, even for non-financial companies. To quickly recap, the Volcker Rule can impact non-financial companies in two ways: 1) the treasurers will be impacted in their efforts to raise capital and mitigate risk, creating potential legal issues that counsels need to be aware of, particularly the potential trade-by-trade scrutiny that five separate regulatory agencies can undertake and 2) if non-financial companies own banks, they will need to build out extensive compliance programs under the Volcker Rule.
Under current law, the Consumer Financial Protection Bureau (“Bureau”) does not provide protection for materials subject to the attorney-client and related privileges that the Bureau seeks to review, and perhaps even retain, during the examination process.
In 2006, Congress conclusively addressed this issue in the bank examination context by enacting 12 U.S.C. § 1828(x), which provides that “[t]he submission by any person of any information to any Federal banking agency . . . for any purpose in the course of any supervisory or regulatory process of such agency . . . shall not be construed as waiving, destroying, or otherwise affecting any privilege such person may claim with respect to such information. . . .”
But there is no similar statutory provision regarding information submitted to the Bureau. The Bureau has recognized the importance of this protection and addressed this issue as best it can through a bulletin issued on January 4 stating that “the provision of information to the Bureau pursuant to a supervisory request would not waive any privilege that may attach to such information.”
The House of Representatives is poised to pass H.R. 4014, which would codify the Bureau’s interpretation.
Finally, corporate counsel should be aware of a new activist agenda at the Public Company Accounting Oversight Board (“PCAOB”). The PCAOB regulates auditors. However, the PCAOB has unveiled several proposals that are going deep into corporate governance, including mandatory audit firm rotation, auditor discussion and analysis, enhanced audit committee communications and executive compensation reviews.
These proposals have been quite controversial and have drawn the attention of directors, particularly audit committee members. As an example, the mandatory audit firm rotation proposal drew 411 comment letters from businesses or directors opposed, and only three from investors in favor.
Corporate counsel should discuss these matters with audit committee members and CFOs to obtain a better understanding regarding company impacts and increased liability risk that will happen if these proposals are finalized.
2012 will prove to be a busy year for governance issues in Washington. Many of the issues that are discussed in this article are on a dual track: some form of regulatory action that is possible this year, and, depending on election outcomes, possible legislative actions next year.
It behooves corporate counsel to keep abreast of these developments to allow the contemplative discussions needed to develop appropriate strategies and responses.
As my father used to say, he who hesitates is lost. If you hesitate in this environment, you will lose.
Tom Quaadman is Vice President, U.S. Chamber Center for Capital Markets Competitiveness.